Income Distribution: Income sharing and income distributionContributed by: Gerry Redmond, Social Policy Research Centre, The University of New South Wales

The choice of sharing unit has some impact on the degree of measured inequality. Generally, estimates of inequality decrease as the scope of the sharing unit is expanded.

Cash income is widely used as a measure of living standards. This is because income is used to meet day-to-day living expenses, and provides the basis for increasing wealth and purchasing more substantial goods and services (such as household furnishings, cars, and holiday trips). Although income is mostly obtained by individuals, it is often used to support others, particularly family members with whom the individual lives. The understanding that income is shared underpins studies of how resources are distributed in the community and assists with identifying groups of people who may be in need of income support (see Australian Social Trends 1998, Poverty: different assumptions, different profiles).

However, there is some debate among income policy analysts as to the best choice of unit that should be used. This review illustrates possible choices of sharing units and how these choices affect measurements of the distribution of income within the population overall and within the growing number of family households maintaining children who have completed their education.

Sharing units

Asharing unitis defined as a group of people who live together in a household who share resources so that they all have the same standard of living. The following standard ABS concepts are used in this review to illustrate different sharing unit types. Ahousehold is a person living alone or a group of related or unrelated people who usually reside and eat together.

Family units contain two or more people related by blood, marriage (registered or de facto), adoption, step or fostering, who live in the same household. A family unit cannot contain more than one couple relationship or a couple relationship plus a lone parent/child relationship. Some households will, therefore, contain more than one family.

Income units (sharing units used for disseminating ABS income statistics) are based on partner and specific parent/child relationships. Partners (married or defacto) are assumed to be interdependent, and children aged under 15 years plus older full-time students (defined as dependent children) are assumed to be dependent on parents. Non-dependent children, and others not having any of the above relationships within a household, are recognised as single-person income units.

Dependent children are those aged less than 15 years, or 15-24 and both studying full-time and living with parent(s) and who do not have a spouse or offspring of their own living with them.

Non-dependent children are those living with parent(s) who do not have their own spouse or offspring and are aged 25 or more or are aged 15-24 and are not studying full-time.

Measuring income

Income is gross income (that is, income before taxes are deducted). Per capita income is the total income of the sharing unit divided by the number of people (adults and children) in the sharing unit.

Income quintiles are formed by ranking all sharing units in ascending order by level of per capita income, and then dividing them into five groups, each containing 20% of all people in the population.

Selecting a sharing unitThe choice of sharing unit for the provision of social security benefits and, more generally, for the analysis of income distribution is made on the basis of assumptions about sharing. Issues associated with sharing assumptions and the choice of sharing units can be illustrated by describing a hypothetical household in which there are a variety of relationships. The example involves a seven-member household comprising a married couple, their employed daughter, her friend who is a boarder in the house, another daughter who is aged 20 and a full-time student, and the husband's parents (or daughters' grandparents).

It could be assumed that the entire household is a sharing unit - that is, all household members pool their incomes. This may be true to the extent that they all avail themselves of the same household facilities and domestic appliances, and may also share other expenses. However, it is arguable that other goods and services enjoyed by individuals (e.g. spending on personal items such as clothing, or the use of a car) will be purchased according to family incomes. Accordingly, it could be assumed that individuals in the family unit comprising the couple and their two daughters are likely to share things among themselves, but not so much with the individuals in the family unit comprising the grandparents. In this case the family unit (defined narrowly) may be seen as the most appropriate sharing unit.

There are four income units in the household, as shown in the diagram. Here, the family unit consisting of the couple with two daughters issplit into two income units, the first containing the couple and the student daughter, who is a dependent child of the couple, and the other containing the employed daughter, who is a non-dependent child. It is certainly possible to argue that the employed daughter may have a higher standard of living than the student daughter to the extent that she may have more income which she spends on herself, or may enjoy more holidays or entertainment, and so on.

Many analysts argue that the income unit, which comprises parent(s) and dependent children only,is the most appropriate sharing unit in the study of living standards, for two reasons: first, it seems safest to assume that the closer the relationship between household members the more likely it is that income will be shared1,2, and second, the income unit is recognised by government agencies as a unit of sharing. That is, in assessing entitlement to some income tax reliefs and to social security benefits (such as unemployment benefits), the government assumes that income is shared within the income unit.

Each of the sharing units discussed above has some validity, although it is possible to devise other sharing units. For example, it could be argued that in the case of the household discussed above, the couple and their children may share resourcesto a considerably greater extent with the couple's parents than with the boarder. At the other extreme, some research has shown that sharing between couples, or between couples and their dependent children, cannot be automatically assumed to take place.3

In practice, the choice of sharing unit is governed by the concerns of policy (how the unit is defined for social security or tax purposes), convenience (according to information available in the survey data) and convention (in line with how other analysts define the sharing unit).

INCOME RECEIVED BY PEOPLE(a) IN DIFFERENT PER CAPITA QUINTILES OF INCOME DISTRIBUTION IN 1995-96 BY SHARING UNIT TYPE

Share of total income

Average per capita income

Income units

Families and single people(b)

Households

Income units

Families and single people(b)

Households

Income quintile

%

%

%

$

$

$

Lowest 20%

5.3

5.9

6.0

81

89

91

Second

10.2

10.6

10.9

155

161

163

Third

14.8

15.5

15.6

224

234

237

Fourth

23.6

23.3

23.3

355

354

353

Highest 20%

46.1

44.7

44.3

703

678

671

Total

100.0

100.0

100.0

303

303

303

(a) Per capita income of all people, including children and adults. (b) Includes persons living alone, individuals in group households and non-family members living with families which are all treated as separate sharing units.

Source: Unpublished data, Survey of Income and Housing Costs, 1995-96.

Income distribution among households, families and income unitsOne commonly used measure of income inequality is the share of total income received by people in different income quintile groups. If there were no inequality, then the people in each quintile group would each receive 20% of total income. To facilitate comparisons in this analysis (both within and between types of sharing unit), incomes within any sharing unit type are measured at the per capita level.

In Australia in 1995-96, people in the bottom quintile of the income distribution received 5.3% of all incomes if sharing among individuals within income units is assumed. Those in the second lowest quintile received 10.2%, while those in the top quintile received 46.1% of total income. While the distributions are similar if sharing among individuals within families, or among individuals within households is assumed, estimates of inequality decrease as the scope of the sharing unit is expanded. Thus, income shares were higher for people in the bottom three quintiles of the income distribution if sharing within households, rather than income units, is assumed. Income shares were correspondingly lower for people in the top two quintiles if sharing is assumed to take place within households.

The lower level of income inequality when larger sharing units are assumed can also be seen by comparing average per capita incomes of people in the lowest and highest quintiles using different sharing assumptions. When comparing income unit incomes, the average per capita income of those in the highest income quintile ($703) was 8.7 times higher than those in the bottom quintile ($81). In contrast, when using households as the sharing unit, the differences were smaller ($91 compared to $671) - with the top quintile being only 7.4 times higher than the bottom.

DISTRIBUTION OF PEOPLE BY LIVING ARRANGEMENTS, 1981-82 AND 1995-96

1981-82

1995-96

Households with:

Households with:

One income unit

Two or more income units

Total households

One income unit

Two or more income units

Total households

Household type

%

%

%

%

%

%

Single family households

62.4

22.0

84.4

61.6

21.6

83.2

Other households

7.5

8.1

15.6

9.3

7.6

16.8

Total

69.9

30.1

100.0

70.8

29.2

100.0

Source: Unpublished data. Income and Housing Survey, 1981-82; Survey of Income and Housing Costs, 1995-96.

Changes in living arrangementsMonitoring the circumstances of people with low incomes in particular life situations (school leavers, one-parent families, older people who have retired) and how they live, whether on their own or with others, is important from a social policy perspective because it provides information on how support might best be targeted.

More generally, changes in living arrangements over time may indicate changes in the way people share their resources. For example, if the proportion of people living in multi-income unit households (like the one given in the earlier example) was increasing, choosing income units to identify people in relative poverty might be less relevant, simply because the opportunity for people to share resources with family or household members will have increased. If, on the other hand, the proportion of people living in single-income unit households increased, the opportunities for sharing resources will have decreased. Differences in the sharing assumptions would clearly be less relevant if more people were to live in households with only one income unit, since for these people income unit, family, and household are the same.

Information from income surveys conducted in 1981-82 and 1995-96 indicates that there has been little change through the 1980s and 1990s in the distribution of people living in different household types when classified according to different types of sharing unit. In both years, about seven in ten people lived in single-income unit households, mostly as single-family income units. Therefore, the proportion of people living in households with more than one income unit, for whom various assumptions might be made about sharing, was roughly the same in both years (about three in ten). Some of these people lived in group households or households with more than one family. However, in both years, most of the people in multi-income unit households lived in single-family households (typically families with non-dependent children). People in single-family households with more than two income units comprised 22% of the population in both 1981-82 and 1995-96. Taken together, this information suggests that the choice of sharing unit will have had little effect when measuring changes in income distribution over the last decade (the relative number of different types of sharing units remained much the same).

There have, nevertheless, been changes in living arrangements not so apparent from the sharing unit types commonly used for analysis. For example, it is known that more older children, including those aged 25 years and over, are living in the family home in the 1990s (for changes in proportions of older children living with their parents see Australian Social Trends 1999, Family - National summary tables), which suggests that there has been an increase in the proportion of people living in single-family multi-income unit households. However, as shown, the overall proportion of multi-income unit families has remained stable.

The anomaly relates to the fact that children aged 15-24 years are increasingly likely to be classified as dependants (that is, belonging to a family income unit) rather than non-dependent children (or single-income units) because children of this age have been staying in full-time education longer. In 1995-96, 50% of 15-24 year olds living with their parents were classified as dependants, compared with 39% in 1981-82.

Comparisons over timeThe comparisons provided in this review are based on information obtained from the Income and Housing Survey, 1981-82, and the 1995-96 Survey of Income and Housing Costs. Comparisons between the two surveys have been enabled by adjusting for various differences in the available data. These adjustments included: standardising the definition of dependants; excluding the income of dependent children from the income of the respective sharing unit types; setting negative incomes to zero; and making comparisons on the basis of current gross income, rather than other measures of income available from the respective sources. Although after-tax income comparison would be desirable, data limitations from these sources prevent that.

AVERAGE INCOME OF PEOPLE IN SINGLE FAMILY HOUSEHOLDS WITH NON-DEPENDENTS BY SHARING ASSUMPTION, 1981-82 AND 1995-96

1981-82

1995-96

Per capita income of each unit - no sharing between units

Per capita income of household members after sharing

Per cent Difference

Per capita income of each unit - no sharing between units

Per capita income of household members after sharing

Per cent Difference

Income unit type

$ per week

$ per week

%

$ per week

$ per week

%

Primary income unit(a)

161

170

+5.6

343

341

-0.6

Non-dependents

185

170

-8.1

341

341

0.0

(a) Comprises income units containing the parent(s) of the non-dependant(s).

Source: Unpublished data. Income and Housing Survey, 1981-82; Survey of Income and Housing Costs, 1995-96.

Effect of sharing assumption within single family households The changing circumstances of youth, and their financial dependency on parents, has been a matter of social policy review.4 It is in this context that is useful to examine how different sharing assumptions have affected per capita incomes of families with non-dependent children (those not considered to be sharing income) over the 1980s and 1990s.

For this purpose, income units in these households are divided into two groups: income units containing the parent(s) (defined as primary income units); and those made up of non-dependent children.

In 1981-82, if sharing only among income units is assumed, the average weekly per capita income of people (parents and dependants) living in primary income units was $161, and the average income of non-dependent income units was $185. If equal sharing among all people in these households is assumed, the average per capita income was $170. Therefore, the per capita incomes of non-dependants made a positive contribution to the per capita incomes of the family.

Between 1981-82 and 1995-96, primary family income unit per capita incomes rose from $161 per week to $343 per week. In other words, they more than doubled (up by a factor of 2.1). Aside from the general inflationary increase in incomes, this increase will, in part, be associated with factors such as the increased participation of older women in the workforce. In contrast, the income of non-dependants did not increase to the same extent (rising from $185 to $341, up by a factor of 1.8). This trend reflects the relative decline of young people's earnings in relation to adult earnings (see also Australian Social Trends 1997, Youth income). As a result, the per capita incomes of non-dependants did not increase family per capita incomes. In contrast to 1981-82, the average contribution of non-dependent per capita incomes to household per capita incomes in 1995-96 was largely neutral. The findings indicate that the choice of sharing unit has less effect on per capita incomes in the mid 1990s than the early 1980s.

Thus, it appears that a relative decline in the incomes of young people has coincided with an increasing likelihood that they will remain longer in the family home. This factor, combined with increasing incomes among the parents of young adults, suggests that the nature of sharing within families may be changing. In the analysis of income distribution in Australia, it is important to consider the likely impact of these changes, and to constantly reassess assumptions about sharing within households, families and income units.